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GUILTY PLEA BOOSTS KPMG CASE PROSECUTION

September 11, 2007

A few weeks ago, the high-profile tax shelter prosecution of former KPMG seemed on the verge of collapse. A guilty plea may give it new life. From today's New York Times:

The government’s criminal case against promoters of questionable tax shelters took a step forward yesterday when an investment adviser at the center of the inquiry pleaded guilty and provided new details on those involved.

The plea by David Amir Makov, 41, in Federal District Court in Manhattan is expected to bolster the government’s investigation of Deutsche Bank over its work with questionable shelters, including one known as Blips, whose workings Mr. Makov described in detail yesterday.

The work must have been profitable; Mr. Makov agreed to pay a $10 million fine. His plea may help prosecutors argue that the shelters were not agressive tax planning, but mere shams. He explained the "BLIPS" tax shelter, versions of which were marketed by KPMG and others. The shelter is reported to have generated over $5 billion in false tax losses. From the Times report:

Although Blips were created on paper to look like seven-year investments, it had neither real loans nor a real investment component, Mr. Makov explained yesterday. "There was no economic substance," he said. "Instead, we created the appearance of economic substance, rather than the reality." Mr. Makov added that he was "clearly told by Bank A, KPMG” and others “that the loan was not at risk."

While he initially thought that Blips were legitimate, he said that "as part of the deception" he was eventually "asked by representatives of Bank A," among others, "to come up with an investment rationale."

How's this for a rationale: "to generate $10 million to pay my criminal fines."